One analyst’s take on how the economic-equality gap got so large

Posted on December 1, 2011 in Debates

Source: — Authors: – business
November 30, 2011.    By Rick Goldman, Freelance

The Canadian camps of the Occupy Wall Street movement have now been cleared, with protesters vowing to shift to other forms of civil disobedience. The U.S. movement is still hanging on, in the face of sometimes-aggressive police action. Whatever shape the movement may take in the future, it might do well to adopt the recommendations in U.S. economist Dean Baker’s new e-book The End of Loser Liberalism as its policy manifesto.

Baker, the co-director of the Center for Economic and Policy Research, a liberal Washington-based think tank, was one of the few U.S. economists to warn about the inflating housing bubble – long before it collapsed, and at a time when U.S. Federal Reserve chairman Alan Greenspan was insisting that all was well.

The Occupy Wall Street movement has brought economic inequality to the forefront of public debate. Baker argues that this inequality is the result of the neo-conservative revolution – kicked off by U.S. president Ronald Reagan in 1980 – of the rich using government intervention to funnel wealth from the vast majority to themselves.

Among the key policies of this upward redistribution of wealth have been an allout assault on unions; freetrade agreements that put U.S. workers in competition with low-wage workers overseas and thus make it easy to move production abroad; the Federal Reserve’s obsession with maintaining low inflation even at the cost of high unemployment; and, of course, financial deregulation that led to a bloated and wasteful financial sector.

These changes put the U.S. economy on a path fundamentally different from that of the three post-Second World War decades, during which workers benefitted from gains in productivity via wage increases and could thus support a robust level of domestic demand. Companies, in turn, had a strong incentive to reinvest in productive activities and further boost productivity, the benefits of which were passed on, in part, to workers.

The neo-conservative policies, by contrast, led to stagnating wages for the majority, sagging domestic demand and, consequently, less incentive to reinvest in domestic production. The growth engine of the U.S. economy shifted instead to “bubbles” (first, the tech-stock bubble of the 1990s, and then, the housing bubble of the past decade) that propped up consumer demand with the temporary wealth this demand created – until the bubbles inevitably burst.

It is therefore wrong, in Baker’s view, to blame the current economic downturn mainly on the financial crisis. The financial meltdown made things much worse must faster, but the underlying problem was the upward redistribution of income, which began decades earlier and laid the basis for the bubble economy.

The short-term solution is not rocket science. As Baker and others, such as New York Times columnist and Nobel economics laureate Paul Krugman, have argued, it has been clear since the Great Depression how to revive an economy suffering from insufficient demand: governments must increase spending (ideally on useful things like fixing bridges and hiring teachers and nurses) to stimulate the economy.

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